May 23 (Bloomberg) -- FuelCell Energy Inc. may be the first
company to turn a profit producing systems that generate power
chemically from natural gas, as the fuel’s historic price plunge
drives sales.

Revenue began exceeding manufacturing costs a year ago, and
Chief Financial Officer Michael Bishop expects to report a
profit once annual fuel cell production exceeds 80 megawatts, up
from 56 megawatts this year, a target that’s in sight as
partnerships in Europe and Asia spur demand.

“Fuel cells are beginning to turn the corner after decades
of struggle,” Dan Reicher, executive director of the center for
energy policy and finance at Stanford University, said in an
interview. “Low natural gas prices are helping drive the
market.”

The century-old concept provided electricity on the space
shuttle and is becoming financially viable on the ground as a
glut of shale gas in the U.S. drove down prices 80 percent from
mid-2008. That’s making electricity from FuelCell’s systems more
competitive with utilities, said Walter Nasdeo, an analyst at
Ardour Capital Partners LLC in New York.

“The economics are becoming very compelling,” said
Nasdeo, who raised his 12-month target price on the shares to
$2.50 from $1.50 in March. “Cheap gas makes it that much easier
for FuelCell to sell their story.”

Chemical Reaction

Stationary fuel cells, shipping container-sized systems
that can power a large building or small campus, generate power
by pushing gas through a membrane. That triggers a reaction,
producing heat, water and electricity, and about half the carbon
emissions of plants that burn fossil fuels.

“When we meet with investors, the first thing our CEO does
is thank them for their patience,” Bishop said in an interview
at FuelCell’s Danbury, Connecticut, headquarters. “We’re
getting to the point where their patience will pay off.”

A key part of FuelCell’s growth strategy is forming
partnerships with international companies that can deliver
government and industrial customers.

FuelCell’s biggest customer and biggest backer is South
Korea’s largest steelmaker Posco, which ordered 70 megawatts of
power plants in 2011 and agreed to buy an additional 120
megawatts in March. Posco, which owns 17 percent of FuelCell, is
using the systems at factories and reselling them in Asia. The
steel company also licensed the technology and expects to begin
making them in 2015.

International Partnerships

FuelCell has partnerships to expand in other continents.
Abengoa SA, a Spanish renewable-energy developer, agreed in
December to build projects in Europe and Latin America using the
company’s systems and is installing a 300-kilowatt FuelCell
device at its headquarters.

Germany’s Fraunhofer IKTS formed a joint venture with
FuelCell in February to develop European projects.

The company has reported losses every year since 1997 and
its shares are down 98 percent from $51.50 in 2000 when FuelCell
broke ground on its first commercial factory.

FuelCell has backlogged orders to install 182 megawatts of
systems and the shares have gained 14 percent this year. Net
losses are expected to decline 54 percent this year to $22.2
million, according to data compiled by Bloomberg.

There are two main types of fuel cells. FuelCell and a
handful of rivals, including Bloom Energy Corp. and United
Technologies Corp., offer large, stationary units. Companies
such as Plug Power Inc. sell smaller devices for electric
vehicles. Neither market has been profitable for the companies
that make them.

Dedicated Power Source

Fuel Cell’s power plants cost about $3 million to $3.6
million a megawatt of capacity. The largest is 2.8 megawatts.
Installation adds another $800,000 to $1.2 million a megawatt.
The company markets them as on-site power sources for large
corporate buildings, hospitals, schools or factories.

FuelCell’s systems produce electricity for about 15 cents a
kilowatt hour. That’s cheaper than solar farms, which sell power
for an average of 16.9 cents a kilowatt-hour. And, unlike
sunlight, fuel cells run constantly.

Fuel cells aren’t as cheap as buying electricity from
utilities, which charge an average of 11.4 cents a kilowatt-hour
for U.S. residential power.

“We’re reaching the tipping point and getting repeat
customers,” said Mike Glynn, marketing director for United
Technologies’ UTC Power unit, which doesn’t report separate
financial results. “In a couple years we expect cost reductions
will allow us to market them without subsidies.”

Wal-Mart

Wal-Mart Stores Inc. is using fuel cells from Bloom Energy
at 24 sites in California and is considering other locations.

“We’ve been watching fuel cells for a long time,” Greg
Pool, the retailer’s renewable energy director, said in an
interview. An on-site power supply may be valuable during an
emergency, such as a hurricane in the Gulf Coast region. With
on-site electricity, “the Wal-Mart store may be the only thing
open -- with ice and water and power -- within 100 miles.”

FuelCell runs its factory in Torrington, Connecticut,
nonstop, five days a week. By boosting that to seven days a
week, as FuelCell plans to do, the company will turn out systems
with about 90 megawatts of capacity a year.

“As they accelerate production I’d expect to see
profitability late this year or early next year,” predicted
Ardour’s Nasdeo.

Falling Production Costs

When combined annual production from Posco and the
Connecticut factory reaches 210 megawatts, FuelCell’s average
cost of power production will drop as low as 9 cents a kilowatt-hour, Bishop said.

That’s based on a gas price of $8 per million British
thermal units, about four times the current price.

Gas futures reached a decade-low of $1.91 per million
British thermal units on April 19. Prices have dropped 51
percent in the past year and are down 82 percent since mid-2008.

“Posco provides the validation they needed,” said Mike
Lew, an analyst at Needham & Co. in New York who has a hold
rating on the shares. “Now that they’re gross-margin positive
with a pipeline visibility of about 80 megawatts a year, they
are on the right path to grow.”